November Financial Fitness Challenge--Try a ''Cash Only'' Experiment

by Susan Tiffany, CCUFC

When it comes to spending money, I have three weaknesses—yarn stores, book stores, and hardware stores. It's gotten so I don't even pretend to have any will power when heaps of merino and alpaca and cashmere yarn are in my path. If you're another knitting addict, you can empathize.

As for book stores, I check that vulnerability by using the public library, one of the finest institutions of our culture. I can leave with a pile of books and DVDs and feel virtuous for not having spent any money.

But I have no defense against the well-stocked hardware store. A few weeks ago I stopped in one to pick up supplies to shore up a weakening fence post. I left with the wood hardener and filler I needed—as well as two furnace filters, a matching towel bar and toilet paper holder, and a jug of household ammonia. There were some other things, too, but I can't make out what they were from the receipt. All I know is that it came to almost $100.

Good thing I had my credit card with me.

Use cards, pay more

Of course, I've known of research for some time that shows consumers tend to spend more money when they use credit than when they pay with cash. So you can guess how interested I was to see, a few days after my hardware store spree, the results of a study series reported in the Journal of Consumer Research. This latest set of studies indicates that paying with credit or debit cards makes people more likely to make impulsive, unhealthy food purchases.

The authors wrote, "[P]aying in cash feels more painful than paying by credit or debit card. This pain of paying in cash can curb impulsive responses and thus reduce the purchase of such vice products." Vice products, in these studies, were foods consumers not only believed to be unhealthy but felt bad about buying, after the fact.

Consumers hang on to cash harder when the bills are in large denominations, say $100.

Vice products for me would be fine yarns, whodunit book series, and ratchet screwdrivers.

The study, and earlier ones, show that you part with money more readily when the transaction is least transparent, to use the research term. When you pay cash, it's clear right away—transparent—how much money you're surrendering for a product or service. It's more painful to pay with cash, so you think twice about it.

For example, a Dun and Bradstreet study found that consumers spend 12% to 18% more when using credit cards than paying with cash. They discovered that the average McDonald's transaction went from $4.50 to $7 and the average vending machine transaction nearly doubled when consumers used credit.

Using a credit card simply gives you access to more funds, and makes it less apparent that you're spending, than handing over cash.

Go "cash only" for 30 days

Here are a few more things we can learn from research about spending:

Always shop with a list. This is common advice for grocery shopping, but it carries into other shopping trips, too. Studies indicate shoppers are less impulsive when shopping on weekends, attributed to the "shopping list effect." Weekend shopping trips are more likely list-based, and thus less vulnerable to impulse buying.

Carry big bills. Not only do consumers pay less when they pay cash, but they hang on to cash harder when the bills are in large denominations, say $100. You might fear that once you break that large bill, you won't be able to stop spending the rest—researchers call it the "what the hell" effect. There's more psychological pain in parting with $100 than in parting with $20.

The pain of paying in cash can curb the purchase of vice products.

Postpone shopping one hour. Give that shopping impulse a cooling-off period that can help you spend less.

If you're never sure where your money goes, you might be ready for a little experiment of your own. Try using cash for a month and see if you get some answers. Even trying it for one week might be an eye-opener, and a habit changer.

Financial Fitness Challenge

The people at your credit union bring you this Web site and other tools, such as personal finance coaching, to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.

Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.